Earlier this week, the government published a consultation on a new power to enable the National Security Council to block UK public listings on national security grounds. This follows concerns first highlighted in its 2019 Economic Crime Plan that there are remote but possible scenarios in which a company listing in the UK could present a risk to the nation’s security; the subsequent Hill review and the further announcement that the government intended to bring forward this precautionary power (please see the timeline below for further details). It is intended that the new power will sit alongside existing protections and safeguards in place in the UK under the anti-money laundering and sanction framework.
Consultation on Power to Block Listings on National Security Grounds
Why is this new power being proposed?
Although the FCA has the power to refuse listing on the grounds of potential "investor detriment", this power will not necessarily allow it to withhold listing on national security grounds. The weakness of this fragmented approach was illustrated by the controversy surrounding the London listing in 2017 of EN+, an energy company which was then controlled by Oleg Deripaska, a Russian Oligarch who subsequently became subject to US sanctions. In the Treasury Committee's report, Economic Crime - Anti-money laundering supervision and sanctions implementation, the committee concluded that, on the evidence, "while the proposed listing was carefully analysed given its sensitivities, the narrowness of the sanctions regime meant that the listing could not be blocked."
What is the new power?
The proposed precautionary power, which is designed to complement the Hill review recommendations on listings and intended to help maintain the UK's status as a top destination for listings, would ensure that the government has the ability and flexibility it needs to intervene in a small number of cases where a listing or new admission to trading raises national security risks.
On the face of it, the proposed power should have a minimal impact on listings. In particular, the government states that the new power:
- will be a "targeted power" with "minimal impact" on the listing process;
- will not affect the vast majority of companies seeking to raise capital on UK markets;
- is intended to fit within the existing listings /admission process and requires "minimal additional action" from prospective issuers;
- will be narrowly focussed on national security grounds; and
- will be subject to proportionality and transparency principles to avoid additional burdens on companies.
The consultation paper sets out an illustrative scenario in which it may be appropriate to use the power.
Scope of the power
The scope of the power is intended to cover all initial equity listings and admissions on UK public markets and therefore includes:
- shares, securities representing equity (for example, GDRs) and convertible securities;
- regulated markets (such as the LSE's main market) and multilateral trading facilities (including AIM) that allow primary equity listings; and
- IPOs and other listings structures, such as introductions and special purpose acquisition companies ("SPACs").
The power will not extend to:
- secondary listings;
- listed debt securities (except for the convertible securities mentioned above); or
Under the proposals, for the purposes of national security screening of listings, issuers will be required to make the following additional disclosures:
- information about the issuer (basic details about name, registration and incorporation);
- business overview (including operations, principal activities, relevant markets and a description of the group);
- management (details of directors, partners, founders and senior managers, including any previous convictions or public incrimination/ sanctions in the previous 5 years and details of other directorships or similar positions in the previous 5 years);
- major shareholders (those with notifiable interests; details of public incrimination or sanctions; details of the direct and indirect ownership or control of the issuer, and the measures put in place to ensure such control is not abused); and
- the offer (reasons and, where applicable, estimated net proceeds broken into each principal intended use and presented in order of priority).
The government does not expect the additional disclosures to present a significant burden for companies:
- which are producing a prospectus, as most of these disclosures are already likely to be made under the relevant rules; or
- which are eligible for a prospectus exemption given the other routine disclosures that are made throughout the listings or admission process.
However, it is seeking views from those who represent, or do business with, smaller companies who could be more affected by these disclosures.
The government is also looking at an early disclosure option for companies seeking assurance before choosing to list in the UK – under this route, companies would be permitted to submit the additional disclosures on appointing a sponsor or nominated adviser and could update the information at a later date if necessary.
What effect will the power have in practice?
The Treasury has said: “The UK’s reputation for clean, transparent markets makes it an attractive global financial centre. We are planning to bolster this by taking a targeted new power to block listings that pose a national security threat." However, some business leaders have warned the move risks undermining attempts by ministers to present the UK, and the City of London in particular, as open for business after Brexit.
In practice, we expect that it will be business as usual for most IPOs; however, as outlined above, there will potentially be an additional disclosure burden on smaller companies and the new rules will become a further factor to be considered by companies seeking to carry out a UK public listing.
What are the next steps?
The consultation closes on 27 August 2021, after which the government will publish a formal response. It expects further technical consultations to be necessary as the power is developed. The government will also carefully consider the outcome of the consultation on the UK's prospectus regime and how it interacts with this proposed precautionary power.
Timeline of events leading up to consultation
In its Economic Crime Plan 2019-22 HM Treasury committed to lead an investigation into whether a power to block listings on national security grounds would be appropriate
The government published a written statement announcing that it intended to bring forward a precautionary power to block securities listings on a UK public market on national security grounds, indicating that the Treasury would publish a full consultation to inform design of the power in early 2021
HM Treasury published the report of the UK Listing Review, chaired by Lord Hill. The report identified a need for reform, including of the Listing Rules and the prospectus regime
The government published a written statement confirming how it will take forward the recommendations directed towards it by the UK Listing Review
The National Security and Investment Act 2021 was published. Once fully commenced, it will establish a new, standalone statutory regime for government scrutiny of, and intervention in, acquisitions and investments for the purposes of protecting national security
A consultation was published on the power to block listings